Here's What To Make Of EZTEC Empreendimentos e Participações' (BVMF:EZTC3) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at EZTEC Empreendimentos e Participações (BVMF:EZTC3), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on EZTEC Empreendimentos e Participações is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.058 = R$275m ÷ (R$5.1b - R$343m) (Based on the trailing twelve months to September 2021).

Thus, EZTEC Empreendimentos e Participações has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.5%.

See our latest analysis for EZTEC Empreendimentos e Participações

In the above chart we have measured EZTEC Empreendimentos e Participações' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering EZTEC Empreendimentos e Participações here for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at EZTEC Empreendimentos e Participações. The company has consistently earned 5.8% for the last five years, and the capital employed within the business has risen 57% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On EZTEC Empreendimentos e Participações' ROCE

In conclusion, EZTEC Empreendimentos e Participações has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 115% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for EZTEC Empreendimentos e Participações you'll probably want to know about.

While EZTEC Empreendimentos e Participações isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.